Edexcel Paper 3 – pre-releaseInvestigating business in a competitive environment

Research topic A: Trends in manufacturers that operate in the global chocolate confectionery

market over the last 20 years, including investment, business growth and takeovers

Worksheet

Syllabus topics covered

• Competitive environment 253

• External finance (investment) 212

• Business growth 321

• Mergers and takeovers 322

• Organic growth 323

Lesson objectives

• To be able to discuss changes in the competitive environment of the global chocolate confectionery market over the last 20 years

• To be able to discuss tactical and strategic reasons why one business may want to takeover (aquire / buy) another.

Starter: Do you know the story behind the photo?

Starter – what happened in 1998?

• Your research topic is to look at the global chocolate market in the last 20 years

• In 1998 (20 years ago) the Day Chocolate company was started by the farmers of the Kuapa Kokoo co-operative in Ghana - supported by Comic Relief!

• The first product to be produced was Divine chocolate, a Fairtrade product, which was aimed at the mainstream market

• 2007 (10 year ago) the Day Chocolate Company changed its name to Divine Chocolate

• Divine chocolate is a social enterprise

Chocolate makes the world go round – Divine chocolate story (Video 14 mins)

https://vimeo.com/27716060

VIMEO version (better quality)

Competitive environment in 1998

Market structure 1998 - 2008

• Seven manufacturers dominated the global market for chocolate in 1998, but the market was quite fragmented with a large number of traditional businesses which had grown organically or through takeovers and mergers

• Mars

• Nestle

• Kraft Foods

• Cadbury Schweppes

• Hershey

• Ferrero

• Lindt

• For example Cadbury Schweppes - The company was formed in 1969 by the merger of chocolate company Cadbury and the drinks giant Schweppes

Competitive environment in 2018

Market structure 2017/18

• After a period of consolidation, with the large MNCs taking over and swallowing up many of the smaller manufacturers, the market has become even more concentrated:

• Mars• Mondelez (formerly Kraft, changed

name and also now owns Cadbury and Green and Black’s)

• Nestle• Ferrero (Owns Thorntons)• Hershey

2017 data

Market overview

• In 2017 / 2018 The global chocolate confectionery market is polarised. At one end the huge MNCs with billion dollar revenues dominate the market and grow through mergers and acquisitions of bands and smaller companies

• At the other end of the market there is a thriving industry of many small bean-to-bar artisan chocolate makers, who are catering to niche market tastes

• Low barriers to entry mean that anyone can start a chocolate business in their kitchen and eventually scale it up – growing organically

Takeovers

Takeover defined

• A takeover is where one business buys a majority shareholding in another business and obtains full management control

• A hostile takeover is when the target company (Cadbury) does not approve of the buyout (by Kraft) and fights against the acquisition.

Why did Cadbury buy Green and Black’s?

• MNC have to keep growing or the investors will leave and take their money with them

• Giant MNCs now look to buy ethical, small scale niche products to improve their brand portfolio and their green credentials

• In 2005 Green and Blacks was the fastest growing UK chocolate brand – with the world’s first organic chocolate bar

Kraft - Cadbury takeover

• August 2009 Kraft launched a hostile takeover bid for Cadbury

• After six months of bids by Kraft which were rejected by Cadbury for being too low, finally in January 2010 Kraft bought Cadbury for £11.5 billion

• Shortly after assuring the UK government that no jobs would be lost, Kraft shut the Somerdale plant near Bristol with 400 UK jobs lost.

Takeover timeline

Hostile takeovers – video clip 5 mins

Why did Kraft want Cadbury?

• Cadbury had a large global presence with strong competitively advantaged positions in high growth emerging economies

• 2008 Cadbury’s Dairy Milk was the no1 chocolate bar in India, Mexico and South Africa

• Cadbury had well-invested supply chain

• Cadbury had a portfolio of strong brands

Dispatches – secrets of Cadbury - video clip 25 mins

Why did Ferrero buy Thorntons?

• Thorntons had been struggling for a while and had tried selling into supermarkets and expanding into ice-cream to prop up sales

• Ferrero the Italian company bought Thorntons to help them expand into the UK

• This brought together two complimentary businesses and allowed Ferrero to gain more UK market share than its Swiss rival Lindt

• Some speculate that Ferrero bought Thorntons as a way to avoid high tax in Italy because it could move more production to the UK

Why did Hershey reject the Mondelez bid?

• Hershey’s board rejected a $23billion offer from Mondelez

• Hershey trust (who have 80% of the shares) rejected the bid as being too low

• Mondelez wants Hershey for its 88% of the N American Market allowing it to get a foothold in the lucrative US chocolate market

• Size matters:

• Mondelez - $29.6 billion revenue

• Hershey’s – $7.4 billion revenue

Reasons for mergers and takeovers

• There are lots of industry specific reasons that one business will takeover another, the ones that your exam board would like you to know about are:

• TATICAL STRATEGIC

1. Access to new markets

2. Improved distribution networks

3. Improved brand awareness

1. Attempt to ensure increased

market share

2. Access to technology, staff or

intellectual property

These are discussed in more detail on the next slides

#1 Tactical - Attempt to ensure increased market share

• A business may takeover or merge with another business in order to increase their market share, in some cases to raise it from 0%

• For example:

• 2015 MARS bought Mexican business Grupo Turin

• This gave MARS a foothold in the premium chocolate market, a new market for the business and ones that it was critically missing

#2 Tactical - Access to technology, staff or intellectual property

• A business may takeover or merger with another business in order to gain access to patents

• In the chocolate industry this could be anything from a secret ingredient in a chocolate bar to the colour of the packaging

#1 Strategic - Access to new markets

• Kraft bought Cadbury as a way into the emerging markets of India, South Africa and Mexico

• Cadbury Dairy milk held #1 or #2 positions in 7 of the top 12 emerging markets

• In 2008 Cadbury Dairy Milk held 11% of global market share in emerging markets

0

5

10

15

20

25

30

35

India South

Africa

Turkey Mexico Argentina Brazil Poland

Ma

rke

t sh

are

(%

)

Country (emerging market)

Chart to show Cadbury's market share in

emerging markets in 2008 before the

Kraft takeover (Source: Euromonitor)

#2 Strategic - Improved distribution networks

• A business may seek to gain improved distribution in certain markets, for example

• Lindt overtook Nestle as North America’s third-biggest chocolate producer in 2014, when it acquired Russell Stover

• Russell Stover makers of the most iconic chocolates – the Forrest Gump box in the film!

#3 Strategic - Improved brand awareness

• Large brands have to fight against supermarket own-labels for market share

• Takeovers and mergers can allow a business to increase brand awareness with customers, therefore increasing revenue and profits for the shareholders who want to see a return on their investment

Business growth

Two types of business growth

• ORGANIC/ INTERNAL

GROWTH A business can choose to grow from within, expanding organically without the involvement of another business

• Alternatively….

• INORGANIC / EXTERNAL

GROWTH A business can also choose to grow by buying up other smaller businesses through takeovers, with the involvement of another business

Internal or Organic growth

• Organic growth means that the business has grown from within

• The business has grown within itself without involvement from another business e.g. without mergers or takeovers

• There are lots of ways that a business can grow organically, these are the most relevant to this industry:

1. New product launches

2. Expanding into foreign markets

Organic growth #1 – new product launches

• A business can grow from within by launching new products

• If the risk pays off then the business will be able to enjoy increased revenue and profits

• Adding to the product portfolio helps to take account of new trends e.g. darker healthier chocolate

Organic growth #2 – expanding into new markets• A business can grow from within

by launching existing products into new markets

• Emerging economies such as India, which is the fastest growing chocolate market globally, provide exiting opportunities for organic growth

“Having launched Divine in the USA nine years after the founding company launched in the UK, it

has been very exciting to see it successfully navigate all the challenges in the USA market and mirror the success of Divine in the UK. We have seen a growing appetite around the world for

business being done differently.”

Advantages of organic growth

• This avoids all the risks and pitfalls of merging with another business

• Can be planned for unlike a takeover

• Owners keep control of their business, and can keep their integrity e.g. using organic ingredients or being Fairtrade

Disadvantages of organic growth

• This is a very high risk strategy

• Long period between investment and return on investment

• Growth may be limited and is dependent on reliability of sales forecasts

• New markets and countries can be risky to enter into without buying a business already operating in that country

Advantages of external or inorganic growth

• A business can capitalise on market opportunities with a takeover or merger

• A business could gain important patented technology or known brands (replace dogs with stars)

• Spreads the risk across a larger product portfolio

• Allows the business to diversify into other markets e.g. coffee

Lindt bought Russell Stover in 2014

It helped Lindt to become the 3rd

largest

chocolate manufacturer in N America and

to gain a large foothold in the giftbox market

segment

Disadvantages of external or inorganic growth• Potential culture clashes with

the business that takes over or merges with the other business

• Possible diseconomies of scale if the business becomes too large

• Duplication of roles and resources e.g. two marketing managers etc.

Plenary quiz

1. Why did MARS buy Grupo Turin?

2. What’s another term for internal growth?

3. Is Divine chocolate an example of internal or external growth?

4. There are two main reasons for takeovers – one is strategic, what is the other?

5. Why did Hershey reject the Mondelez bid?

6. What did Kraft do to the Cadbury Somerdale factory after buying the company?

Plenary quiz answers

1. Why did MARS buy Grupo Turin? To get a foothold in the premium chocolate market in N America.

2. What’s another term for internal growth? – organic growth

3. Is Divine chocolate an example of internal or external growth? Internal

4. There are two main reasons for takeovers – one is strategic, what is the other? Tactical

5. Why did Hershey reject the Mondelez bid? Bid was too low

6. What did Kraft do to the Cadbury Somerdale factory after buying the company? It closed the factory, 400 job losses

Revision Video

Sample questions

• Try these sample questions, some are taken from paper 3 and some are taken from other Edexcel Business papers including the legacy A Level qualification

Case study for question 1

Sample question 1

Level 11-2

Level 23-4

Level 35-8

Level 49-12

Answer sample question 1

Case study for question 2

Sample question 2

Knowledge 2

Application 2

Analysis4

Evaluation4

Answer sample question 2

Case study for question 3

Sample question 3

Knowledge 2

Application 2

Analysis2

Evaluation2

[8]

Answer sample question 3

Case study for question 4

Sample question 4

Knowledge 2

Application 2

Analysis4

Evaluation4

Answer sample question 4

Case study for sample question 5

Sample question 5

Knowledge 2

Application 2

[4]

Answer sample question 5

Knowledge up to 2:

Organic/Internal Growth occurs when a business expands without the involvement of another business (1 mark), for example through expanding the product range (1 mark), opening more branches (1 mark), or employing more staff (1 mark).

External Growth occurs when a business expands with the involvement of another business (1 mark), for example through a merger (1 mark), or takeover (1 mark). NB – do not reward Internal/External ‘finance’.

Application up to 2:

• Morrisons plans for store expansion do not involve other businesses (1 mark) and are therefore an example of Internal/Organic growth (1 mark)

• Morrisons takeover of Safeway (1 mark) involved another business (1 mark) and was therefore an example of External Growth (1mark)

Case study for question 6

Sample question 6

Knowledge 1

Application 1

[4]

Application 2

Answer sample question 6

Knowledge and understanding 1

• Is also known as internal growth (1 mark)

• It does not involve other businesses (1 mark)

• It does not involve takeover (1 mark)

Application 1

• Greggs is opening its own/new stores/shops (1 mark)

• Greggs is opening a new range of coffee shops (1 mark)

• Greggs is keeping the same number of bakeries (1 mark)

• Greggs has a lot of cash on its balance sheet (1 mark)

Analysis up to 2

• Greggs is in full control of organic growth as it does not involve other businesses (1 mark) which therefore avoids possible culture clashes (1 mark)

• Large amount of cash means that such expansion will not bear loan interest (1 mark) which could reduce the cost of expansion (1 mark)

Glossary

• Takeover; (acquisition); when one business is taken over by another by buying the majority share. If the owners do not want to be taken over by that company it is called a “hostile takeover”

• Internal or Organic growth; when a business grown internally without the involvement of another business e.g. expanding product range

• External or Inorganic growth; when a business grows externally with the involvement of another business e.g. a takeover or merger